Unpublished Disposition, 914 F.2d 1496 (9th Cir. 1990)

MEMORANDUM^* 

Charter Title appeals the district court's grant of summary judgment to the United States. Charter held a check drawn on the account of the third-party taxpayer, Crown Mortgage Corporation, at the time when the Internal Revenue Service levied on that account to collect unpaid taxes. Charter claims that it, and not the IRS, is entitled to that portion of the levied account that could cover that check.

The controlling issue on appeal is whether Charter Title acquired an ownership interest in the underlying funds in Crown's account when Crown, the taxpayer, delivered Charter Title the check. This issue is, in turn, governed by section 3-401(1) of the Uniform Commercial Code (codified at Wash.Rev. Code Sec. 62A.3-409(1), which provides as follows:

A check or other draft does not of itself operate as an assignment of any funds in the hands of the drawee [checkwriter's bank] available for its payment, and the drawee is not liable on the instrument until he accepts it.

U.C.C. Sec. 4-303 (codified at Wash.Rev. Code Sec. 62A.4-303) is a corollary provision which provides in pertinent part that a bank's customers' funds are subject to "legal process" until the bank has finished the processing of the check. "Legal process," under this section, includes garnishment orders and bankruptcy petitions. See J. White & R. Summers, Handbook of the Law under the Uniform Commercial Code Sec. 17-7 at 692-93 (2d ed. 1980); see also Mercantile Ins. Co. of America v. Jackson, 242 P.2d 503, 504 (Wash.1952). These processes are analogous to levies. Thus, section 4-303 allows the bank to debit the bank account of a customer, regardless of unaccepted but outstanding checks, upon receipt of an appropriate court order.

Charter Title is correct that the taxpayer breached its contractual duty by failing to "pay the instrument according to its tenor." U.C.C. Sec. 413(1). However, this breach does not entitle Charter to assert an ownership interest in the funds, which is essential to its success in its wrongful levy action against the United States under 26 U.S.C. § 7426.

Charter Title's contention that the taxpayer created an express trust in favor of Charter fares no better. The argument assumes that the issuance of the check created rights in the underlying funds.

Charter Title also contends that Fleet Funding created a trust in favor of Charter Title when Fleet transferred the underlying funds to Crown's account. Such a trust could result only if Fleet had intended to create a trust in favor of Charter Title. See Restatement (Second) of Trusts Sec. 24 (1959). See also Engel v. Breske, 681 P.2d 263, 265, 37 Wash. App. 526 (1984) ("an express trust is created if it appears that there was an affirmative intention to create it"). The burden is on Charter Title to prove "the existence of a trust by clear, cogent and convincing evidence." Id.

Charter Title points to no evidence that suggests that Fleet Funding intended to create a trust in Charter Title's favor, or even that it knew that Charter Title would be escrow agent for the transaction. Fleet Funding's only role was as the independent buyer of a mortgage note from the taxpayer. Because Charter Title has shown no intention by Fleet Funding to create a trust it has failed to meet its requisite burden.

Charter Title's contention that Washington law would recognize a constructive trust in these circumstances is also without merit. The taxpayer owed no fiduciary duties to Charter Title by virtue of Charter Title's role as the taxpayer's escrow agent. It is true that an escrow arrangement creates in the escrow agent certain obligations to the parties. See Fickling & Walker v. Giddens Const. Co., 376 S.E.2d 655, 659, 258 Ga. 891 (1989) ("strictly, however, [the escrow agent] is [really] the trustee of an express trust with duties to perform for each of the parties"); Lechner, 216 P.2d at 185. However, there is no authority that the arrangement creates any duties in the principals. See Bronx Inv. Co. v. National Bank of Commerce, 92 P. 380, 382, 47 Wash. 566 (1907) (escrow agreement creates no cause of action against a principal).

The IRS is not unjustly enriched by retention of the funds. Charter Title does not contest that the Service is entitled to the funds to offset the taxpayer's withholding liability.

AFFIRMED.